Pension Benefit Guaranty Corp. v. Ouimet Corp.

• Decision Date: 22 March 1979
• Docket Number: 77-2005-T.,Civ. A. No. 76-1314-T
• Citation: 470 F. Supp. 945
• Court: U.S. District Court — District of Massachusetts
• Parties: PENSION BENEFIT GUARANTY CORPORATION, Plaintiff, and United Rubber, Cork, Linoleum and Plastic Workers of America, Solomon, Reddix, and Alex Williams, Plaintiff-Intervenors, v. OUIMET CORPORATION, Ouimet Stay & Leather Company, Ouimet Welting Company, Emil R. Ouimet Wareham Trust, Avon Sole Company, Tenn-Ero Corporation and Herbert Kahn, Trustee, Defendants.

470 F. Supp. 945

PENSION BENEFIT GUARANTY CORPORATION, Plaintiff and United Rubber, Cork, Linoleum and Plastic Workers of America, Solomon, Reddix, and Alex Williams, Plaintiff-Intervenors, v. OUIMET CORPORATION, Ouimet Stay & Leather Company, Ouimet Welting Company, Emil R. Ouimet Wareham Trust, Avon Sole Company, Tenn-Ero Corporation and Herbert Kahn, Trustee, Defendants.

Civ. A. Nos. 76-1314-T, 77-2005-T.

United States District Court, D. Massachusetts.

March 22, 1979.

Paul F. Ware, Jr., Goodwin, Procter & Hoar, Boston, Mass., Judith F. Mazo, Barry Slevin, Pension Benefit Guaranty Corp., Washington, D. C., for Pension Benefit Guaranty Corp. Sidney Werlin, Friedman & Atherton, Richard E. Mikels, Cohn, Riemer & Pollack, Paul P. Daley, Hale & Dorr, Boston, Mass., for the trustee in bankruptcy.

Richard Maloney, Maloney, Williams & Baer, Boston, Mass., for the Ouimet Group.

Bertram Diamond, Stamford, Conn., Harold B. Roitman, Boston, Mass., for intervenors, URW, Reddix and Williams.

OPINION

TAURO, District Judge.

At issue here is whether the defendants, several business entities under common control,¹ may be held jointly and severally liable for the termination of an underfunded pension plan by two of their bankrupt affiliates. The plaintiff is the Pension Benefit Guaranty Corporation (PBGC), a creature of Congress born under the provisions of the Employment Retirement Income Security Act (ERISA), 29 U.S.C. § 1302. The prime purpose of that Act is to insure that workers receive the benefits to which they are entitled under private pension plans established for them by their employers. Congress recognized that workers had been unfairly subjected to the loss of expected benefits when underfunded plans terminated. Under ERISA, Congress gave the PBGC the responsibility of administering terminated pension plans to the end that affected workers receive anticipated pension benefits promised them by their employers. It is the PBGC's attempt to administer certain terminated pension plans that underlies this litigation.²

I. PROCEDURAL BACKGROUND

PBGC began this action in April, 1976, pursuant to ERISA, to collect the amount for which the defendant Ouimet companies are allegedly liable as a result of the termination of a pension plan by their two affiliates, the Avon Sole Company (Avon) and the Tenn-ERO corporation (Tenn-ERO). Those two corporations had been adjudicated bankrupt on March 22, 1976. On August 20, 1976, the case was referred to the Bankruptcy Judge sitting as a Master pursuant to Fed.R.Civ.P. 53.

In his report, the Bankruptcy Judge concluded that section 1362 of ERISA³ permitted the PBGC to obtain reimbursement only from the direct employers, Avon and Tenn-ERO. The other members of the controlled group⁴ were held to be free from liability arising out of the termination of Avon/Tenn-ERO's pension plan. The Bankruptcy Judge also determined that Avon and Tenn-ERO were not liable to the PBGC because they had no net worth.⁵

PBGC subsequently appealed the rulings of the Bankruptcy Judge to this court and has also moved to: (1) modify the Master's Report insofar as it finds no liability on the part of the defendant companies; (2) recommit the case to the Master for findings relative to the net worth of the Ouimet controlled group; and (3) enter partial summary judgment for PBGC.

II. FACTUAL BACKGROUND

Avon operated a plant in Massachusetts until March, 1975. In 1973, it formed Tenn-ERO, a wholly owned subsidiary. The companies experienced severe operating losses and on March 22, 1976, were adjudicated bankrupts.

As of the time Avon's Massachusetts plant was closed in 1975, the company was a party to a pension plan agreement, dated May 4, 1959, covering its unionized employees. When Avon shut down its plant, it notified PBGC, as required by ERISA,⁶ that it would soon discontinue operations in Massachusetts and would be required to terminate its pension plan.

Through no illegal or improper conduct on Avon's part, its plan was underfunded when terminated. The primary reasons for the underfunding were that the market value had fallen on certain of the investments comprising plan assets and that the amortization of past underfunded liabilities was not yet complete. See 29 U.S.C. § 1082.

III. THE CONTROLLED GROUP

The ownership picture of the defendant companies, outlined in footnote 1 supra, has significance because of PBGC's position that each of them may be held to make good the deficiencies of the Avon/Tenn-ERO pension plan.⁷ PBGC's theory is that, for purposes of section 1362 liability, the term "employer" includes not only the direct employer of the covered employees, but also all trades or businesses under common control with the direct employer.

At a hearing held before this court on March 6, 1978, the parties agreed that Ouimet, Stay and Welting are a controlled group as that term is defined in the IRC. They also agreed that Brockton should not be so included. They dispute, however, whether the Trust may be considered a member of the controlled group.

Defendants seek to have the Trust excluded from the controlled group on the ground that it is not a trade or business within the meaning of section 4001(b) of ERISA, 29 U.S.C. § 1301(b).⁸ The Trust, by its terms, is a typical Massachusetts business trust, authorizing the operation of a profit sharing enterprise business. See Morrissey v. Commissioner, 296 U.S. 344, 56 S.Ct. 289, 80 L.Ed. 263 (1935). Indeed, the Trust's tax returns show it to be engaged in the real estate business. One of its corporate affiliates, Stay, has a five year lease on a parcel of improved real estate owned and managed by the Trust.

Defendants argue further that section 1301(b) applies only to trades or businesses with employees, and because the Trust has no employees, it may not be deemed an employer. That argument depends on tortured statutory interpretation. The first sentence of section 1301(b) makes it clear that the Trust could be included in the controlled group as an employer although it may have no employees:

An individual who owns the entire interest in an unincorporated trade or business is treated as his own employer, . . ..

Emil Ouimet, who owns 100% of the Trust, would be considered his own employer. This court therefore holds that section 1301(b) includes all trades or businesses that are under common control, regardless of whether they have employees.

Given the parties' stipulation that Brockton should be excluded, and the fact that Stay owns only 50% of that company,⁹ this court finds that the Trust, Stay, Welting, Ouimet and Avon/Tenn-ERO are all members of the same controlled group of businesses.

IV. CONTROLLED GROUP LIABILITY UNDER ERISA

The issue of controlled group liability for termination of underfunded pension plans is one of first impression. Analysis of the statute and review of the legislative history¹⁰ leads this court to conclude that when one member of a controlled group terminates an underfunded pension plan, the entire group may be held liable by the PBGC for purposes of reimbursement under section 1362 of ERISA.

A) The Statute

As the governmental agency in charge of administering the statutory plan of ERISA, the PBGC has interpreted section 1362 as imposing liability on all trades and businesses under common control when an employer within the group terminates an underfunded plan. That determination is subject to challenge and judicial review. 29 U.S.C. § 1303(f); 5 U.S.C. §§ 701, 702.¹¹ A reviewing court must be guided by the construction given a statute by the agency charged with its execution, unless there are compelling indications that it is wrong. Columbia Broadcasting System, Inc. v. Democratic National Committee, 412 U.S. 94, 121, 93 S.Ct. 2080, 36 L.Ed.2d 772 (1973). Here there are no such indications. Indeed, strong support for the agency's interpretation can be found on the face of the statute itself.

The second sentence of 29 U.S.C. § 1301(b) states:

For purposes of this subchapter, under regulations prescribed by the corporation, all employees of trades or businesses (whether or not incorporated) which are under common control shall be treated as employed by a single employer and all such trades and businesses as a single employer (emphasis added).¹²

The provisions of section 1301 are contained in the same subchapter as are those of section 1362, the section imposing liability for reimbursement upon an employer who maintains an underfunded plan at the time of termination. The PBGC argues that section 1301(b) defines "employer" as that term is used in section 1362. Under this theory, the entire control group would be an employer for purposes of section 1362 liability, regardless of whether each member of the group actually contributed to the pension plan. Thus, all members of the controlled group would be potentially liable, jointly and severally, should an affiliate terminate an underfunded plan.

Defendants urge contrary interpretations of sections 1301(b) and 1362.¹³ They start by noting that, under section 1362, an employer must "maintain" a plan in order to be held liable. Maintaining a plan is viewed by defendants as being synonymous with contributing to a plan. Defendants conclude, therefore, that because members of the controlled group in this case did not contribute to the terminated plan, they cannot be held liable under section 1362.

This argument hinges upon defendants' contention that section 1301(b) is not a definition of "employer" for the purposes of section 1362, but was merely intended to supplement a provision in section 1301(a). Defendants' theory is based upon the following rationale. Section 1301(a)(3) of ERISA provides that a "multi-employer plan" means a "multi-employer plan" as defined in section 414(f) of the IRC. That IRC provision defines a multi-employer plan as one to which more than a single employer is required to contribute.¹⁴ A significant "special rule" in that section...